Asset and liability offsetting

IASB and FASB propose to align balance sheet netting requirements

28 January 2011

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The International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB) have published a proposal to establish a common approach to offsetting financial assets and financial liabilities on the statement of financial position (balance sheet).

Offsetting, otherwise known as netting, takes place when entities present their rights and obligations to each other as a net amount in their statement of financial position.

At present, the circumstances when financial assets and financial liabilities may be presented in an entity’s statement of financial position as a single net amount, or as two gross amounts, differs depending on whether the entity reports using International Financial Reporting Standards (IFRSs) or US generally accepted accounting principles (GAAP).

The accounting differences result in the single largest quantitative difference in reported numbers in statements of financial position prepared in accordance with IFRSs or US GAAP. This reduces the comparability of financial statements, and is especially prominent in the presentation of derivative assets and derivative liabilities by financial institutions. As a result, users and preparers of financial statements have asked the boards to find a common solution for offsetting those items. Proposing a common solution is also consistent with requests from the G20 and the Financial Stability Board (FSB).

The boards are proposing that offsetting should apply only when the right of set-off is enforceable at all times, including in default and bankruptcy, and the ability to exercise this right is unconditional, that is, it does not depend on a future event. The entities involved must intend to settle the amounts due with a single payment or simultaneously. Provided all of these requirements are met, offsetting would be required. The proposals would amend IFRSs and US GAAP and eliminate several industry-specific netting practices.

Sir David Tweedie, Chairman of the IASB, commented:

The fact that companies can, in some instances, report IFRS balance sheet figures that are double the size of their US GAAP numbers is not acceptable in global capital markets. Investors, and the FSB, G20 and others, have all called upon the IASB and the FASB to resolve this problem. The proposals would eliminate the differences in offsetting requirements.

Leslie Seidman, Chairman of the FASB, said:

This proposal would eliminate a major difference in reporting relating to financial instruments under US GAAP and IFRSs. Investors expressed a desire for information about both the gross amounts of financial assets and liabilities and the net amounts, if credit risk has been mitigated. This proposal would change US GAAP to require netting in a narrower set of circumstances, but the effect of other forms of credit mitigation would be disclosed in the footnotes.

The exposure draft Offsetting Financial Assets and Financial Liabilities [FASB: Balance Sheet (Topic 210): Offsetting] is open for public comment until 28 April 2011 and can be accessed via the IASB and FASB websites. During the consultation period, the IASB and the FASB will undertake further outreach to seek views on the proposals.

An interactive webcast by the IASB on the proposals will be held at 10am (UK time) on 31 January, and repeated at 3pm (UK time) on the same day. To register, please click here.

A summary of the proposals (IASB Snapshot) is available, please click here.

A “FASB in Focus” document offering an additional overview will be posted on the FASB website.